Governor Erkki Liikanen Bank of Finland - Suomen Pankki€¦ · Suomen Pankki –FinlandsBank –Bank of Finland 1. Commitment to accommodative monetary policy benefits economic outlook

Bank of Finland

Monetary policy and its effectiveness

110.9.2015

Governor Erkki Liikanen

Suomen Pankki – Finlands Bank – Bank of Finland

1. Commitment to accommodative monetary policy benefits economic outlook

10.9.2015 Governor Erkki Liikanen 2


Interest rate policy in 2014

Central bank interest rates reduced to the zero lower bound − Interest rate on main refinancing operations 0.05%

(September 2014)− Interest rate on the deposit facility -0.20% (September 2014)

The full allotment policy safeguarding banks’ access to central bank refinancing will be continued at least until the end of 2016.



The decisions to support provision of credit in 2014

Banks have access to longer-term central bank refinancing (maturing in 2018) at a fixed rate of 0.05% for provision of credit to the real economy (excl. housing).

Third purchase programme for covered bonds issued by banks (CBPP3)

− Since October 2014, purchases conducted to the value of EUR 111 billion

Asset-backed securities purchase programme (ABSPP)

− Since November 2014, purchases conducted to the value of EUR 11 billion



The decisions on large scale asset purchases and forward guidance in January 2015

Expanded asset purchase programme Bonds issued by euro area governments, government agencies and

European institutions as a new target for purchases Combined monthly asset purchases under the three programmes of

EUR 60 billion from March 2015 until at least September 2016 (totalling EUR 1,140 billion)

− The Bank of Finland will primarily buy Finnish government bonds (itself carrying the credit risk involved) and bonds issued by European institutions (for which the credit risk will be shared amongst Eurosystem central banks).

− Forward guidance

Purchases are intended to run until the end of September 2016, or beyond, if necessary, and, in any case, until we see a sustained adjustment in the path of inflation consistent with our aim of achieving inflation rates below, but close to, 2% over the medium term.



2. Large scale asset purchases stimulate both demand and inflation



Signalling and portfolio balance effects of a large-scale asset purchase programme

The signalling effect contributes to re-anchoring inflation expectations more in line with the medium-term objective.

The portfolio balance effect extends the effects across the whole financial system even though only a comparatively narrow range of high-quality securities is purchased. – Investors are encouraged to shift holdings into other asset

classes.



ECB’s accommodative monetary policy

Lowers real interest rates and eases financing conditions in the economy− interest rates at the longer end decline, financing conditions for

companies and households become easier, asset prices rise

− higher inflation expectations mean lower real interest rates

Increases demand and boosts inflation− external value of the euro depreciates− consumption and the profitability of investments increase− corporate and household confidence improves



Divergence in monetary policy cycles has weakened the euro

0.6

0.8

1

1.2

1.4

1.6

1.8

1999 2001 2003 2005 2007 2009 2011 2013 2015

EUR/USD

Source: Macrobond.



Renewed decline in oil price puts downward pressure on inflation

20

40

60

80

100

120

140

160

20

40

60

80

100

120

140

160

2008 2010 2012 2014

Price of crude oil, Northern Sea Brent, USD/barrel (left-hand scale)Industrial commodities excl. energy, USD (right-hand scale)

USD/barrel Index 2010 = 100

Sources: Bloomberg, HWWA and Bank of Finland.



Commitment to accommodative monetary policy stance supports inflation expectations


-0.5

0

0.5

1

1.5

2

2.5

3

3.5

2007 2008 2009 2010 2011 2012 2013 2014 2015

2 year inflation swap 5 year inflation swap 10 year inflation swap%

Source: Bloomberg.

Announcement of the EAPP22 January 2015


Sharp fall in long-term bond yields over the past year, some reversal recently

0

1

2

3

4

5

6

2008 2009 2010 2011 2012 2013 2014 2015

Germany Average yield on euro area government bonds (excl. Greece)%

*Weighted average of euro area countries’ 10-year government bonds (excl. Greece).Sources: Bloomberg and calculations by the Bank of Finland.



Stock market turbulence in August

50

100

150

200

250

300

350

400

450

500

20

40

60

80

100

120

140

160

2007 2008 2009 2010 2011 2012 2013 2014 2015

United States: S&P 500Euro area: DJ Euro Stoxx (broad)Japan: NikkeiChina: Shanghai a share (right-hand scale)

4.1.2000 = 100

Source: Bloomberg.



3. Monetary policy transmission to the real economy is improving



Monetary policy measures support bank lending


-4

-3

-2

-1

0

1

2

3

4

2010 2011 2012 2013 2014 2015

Non-financial corporations Households

annual growth rate, %

Source: European Central BankLoans adjusted for sales and securitisation

Loan growth in euro area


Monetary policy transmission to non-financial corporations improved, but still uneven


0

1

2

3

4

5

6

7

2005 2007 2009 2011 2013 2015

Highly rated countries*GIIPS**Interest on the main refinancing operations%

Source: European Central Bank.* Germany, France, Netherlands, Belgium, Austria and Finland.** Greece, Ireland, Italy, Portugal and Spain.

New corporate loan agreements, average interest


Corporate bond yields remain low, some reversal recently

0

1

2

3

4

5

6

7

8

9

10

2003 2008 2013

3-year AAA-grade 5-year AAA-grade3-year BBB-grade 5-year BBB-grade%

Source: Macrobond.



Average interest rates on new housing loans have declined


0

1

2

3

4

5

6

7

2005 2007 2009 2011 2013 2015

New mortgage loan agreements, average interestHighly rated countries*GIIPS**Interest on the main refinancing operations%

Source: European Central Bank.* Germany, France, Netherlands, Belgium, Austria and Finland.** Greece, Ireland, Italy, Portugal, and Spain.


4. The recovery in the euro area is expected to continue



ECB staff projections in September

(difference to Eurosystem staff June 2015 projections)

GDP:2015: 1.4% (-0.1)2016: 1.7% (-0.2)2017: 1.8% (-0.2)

Inflation:2015: 0.1% (-0.2%)2016: 1.1% (-0.4%)2017: 1.7% (-0.1%)



Inflation outlook subdued in 2015-16


-1

0

1

2

3

4

5

1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

HICP inflation Core price inflation

ECB forecast September 2015%

Sources: Macrobond and ECB.


Finland falls further behind euro area growth

Latest Quarterly National Account release suggests moderate growth outlook continues.

Finland is not expected to reach the pace of euro area recovery during the forecast period.

The labour market situation has deteriorated since June 2015.

Euro area recovery bolsters exports, Russia weakens.

Temporary factors have had a relatively large negative impact on trade figures in 2015Q2.

2210.9.2015 Governor Erkki Liikanen


4. Financial stability and macroprudential policy



The mandate of the ECB

Maintaining price stability will remain the primary objective of the ECB.

Without prejudice to price stability, the ECB will support the general economic policies in the EU, including balanced economic growth.

Financial stability is key to realizing this mandate.

The SSM regulation assigns macroprudential responsibilities to the ECB with power to apply tighter macroprudential requirements than the designated national macroprudential authorities.


Suomen Pankki – Finlands Bank – Bank of Finland10.9.2015 Governor Erkki Liikanen 25

The ECB’s role in the new supervisory architecture

Governing CouncilMonetary Policy:

Price Stability

Macro-prudential Policy:Financial stability

Sources: Smets (2013) and Bank of Finland.

Financial and economic stability

Supervision offinancial institutions

Euro area EU

European SystemicRisk Board (ESRB)

European SupervisoryAuthorities

(EBA, ESMA, EIOPA)

European Central Bank (ECB)

ECB/SSM

Bank Supervision:Solvency and resilience of

individual banks


The ECB reinforces but cannot substitute national macroprudential policies

National macroprudential authorities bear the main responsibility in detecting systemic risks and taking appropriate macroprudential action.

National macroprudential action should be timely, bold and intrusive.

The ECB can reduce the inaction bias inherent in national macroprudential policies.



Macroprudential policy is important in a time of exceptionally accommodative monetary policy

Negative side-effects of accommodative monetary policy cannot be entirely ruled out:

− a prolonged low level of interest rates and the additional relaxation brought by securities purchases could inflate the risks to financial stability;

− the euro area must maintain readiness to actively deploy macroprudential policy tools if required;

− every Member State must have an effective macroprudential toolbox.



5. Transparency improves the accountability and effectiveness of monetary policy



Transparency is an important tool for an independent central bank like the ECB– The days of ‘never excuse, never explain’ and central banks acting as

opaque and secretive institutions are over.

Transparency facilitates accountability and efficiency– The ECB is accountable to achieve its mandate, price stability.– Conveying the Governing Council’s ‘reaction function’ facilitates efficiency

and makes it is easier to attain monetary policy objectives.

The accounts convey a balanced account of discussions in the Governing Council– They provide a fair and balanced summary of the main arguments.– The language reflects the collegiate, consensus-oriented mode of discussion

and decision-making. 29Governor Erkki Liikanen10.9.2015

Transparency, accountability and efficiency: accounts of the monetary policy meetings


Thank you!


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Governor Erkki Liikanen Bank of Finland - Suomen Pankki€¦ · Suomen Pankki –FinlandsBank –Bank of Finland 1. Commitment to accommodative monetary policy benefits economic outlook